Read the full extract from Mises’s book.
A key phrase is: “...an expansion in the production facilities and the production of the heavy industries, and in the production of durable producers’ goods, is the most conspicuous mark of the boom.”
The Fed’s over-expansion of the money supply leads to non-economic investment that has to be liquidated by the recession that inevitably follows.
During the stagflation of the 1970s, investment in commercial real estate was wildly distorted by the Fed’s inflationary over-supply of money. Short term interest rates at times exceeded 20% per annum, and institutional investors and mortgage lenders were demanding at least a 15% per annum return on investment. Most traditional commercial real estate - office buildings, shopping centers, and apartments - couldn’t produce such a high growth rate in net cash flow, because tenants wanted to sign leases with terms of five to twenty five years. The one investment that did qualify, theoretically, was hotels, which could raise their room rents every day, as inflation roared ahead. The result was a massive overbuilding of hotels.
In similar fashion, riding the wave of money the Fed poured into the economy after the stock market’s sharp break in 1986, high tech companies were able to obtain almost unlimited amounts of equity capital, producing the dot-com boom of the 1990s. So much money was seeking any plausible outlet that normal credit and investment standards disappeared. Dot-com startups, with zero sales, obtained hundreds of millions of dollars of venture capital on no more than an idea for a product. When the bubble burst near the end of President Clinton’s second term in the presidency, the nation’s mileage of installed fiber optic cable, for example, was said to be roughly ten times what the market could support.
We all know, of course, the recent repetition of that pattern. Anybody, regardless of creditworthiness, could obtain a mortgage loan and the housing stock, a durable good, ballooned to proportions that the real economy could not support. The Fed’s easy money policy led everyone to assume imprudent amounts of debt. Eventually staggeringly high debt pushed individuals, states, and cities to the brink of bankruptcy and pushed the entire financial structure of the economy to the breaking point.
Exactly the same pattern, based upon some asset class not yet visible, will be repeated in the future, regardless of how many regulations Congress and our bureaucracies create, so long as the Fed is allowed to inflate the money supply in the Keynesian expectation that doing so can prevent unemployment and keep a boom going indefinitely.
Back to summary...
